How Medicare Medical Savings Account (MSA) plans work

Medicare Medical Savings Account (MSA) plan includes both a high deductible health plan and a bank account to pay your medical costs. The MSA plan will pay for most or all of your Part A and B costs after you meet your deductible (as high as $10,600 in 2015). If you enroll in an MSA after January 1, your yearly deductible will be pro-rated to the number of months left in the year. For example, if you enroll in an MSA with a yearly deductible of $6,000 starting September 1, your deductible will be $2,000 (4/12 of the yearly deductible).

The plan will deposit a certain amount of money (that it gets from Medicare) into an account at a bank the plan selects. This bank account is called a Medical Savings Account. The MSA plan will make a new deposit each year.

If you use the account to pay for Part A and B services, it will help you meet your deductible. (Other medical costs do not count towards the deductible). Be aware that the amount deposited will be much lower than your deductible (what you have to pay for services before coverage begins). Once you have used up the money in the account, you will have to pay out-of-pocket for services until you reach your deductible.

You cannot deposit more money into the account. This deposit will be the same for every member of the plan, but different plans can set their own deposit amounts.

The money in the account is meant to be spent on health care expenses. It will not be taxed as long as you use it to pay for “qualified medical expenses” and report these expenses to the Internal Revenue Service (IRS) in your taxes.

Some other rules:

In most MSA plans once you reach your deductible your plan will pay up to 100 percent of the cost of Medicare-covered medical and hospital services (Parts A and B). You may still have to pay something for services once you reach your deductible (unless you see doctors who take “assignment”, meaning they agree to accept the Medicare-approved amount as payment in full).

If you use the account to pay for costs that do not relate to health care (i.e, rent), you will be taxed on the money in the account.

If you choose a plan that offers additional benefits not covered by Medicare from the MSA plan, you will pay an extra premium for them and the plan’s coinsurance when you get the extra services. You can use money from your MSA account to pay for these costs, but whatever you spend on services not covered by Medicare will not count toward meeting your deductible.

If you do not use all of the money deposited in your account at the end of the year, it will stay in your account to use the next year. At the beginning of each year, your plan will deposit another set amount into your account if you are still enrolled in the MSA plan. If you leave the plan at the end of the year but still have money in the account, that money is yours to keep.

If you go back to Original Medicare, you can use any money left in your account to pay for your out-of-pocket costs. Any remaining money will not be taxable as long as you continue to use it for qualified medical expenses. If you leave the plan midyear, part of the money will be refunded to Medicare, depending on the number of months left in the calendar year.